carbonates

Shale Gas: Promises, Promises, Promises

Arthur Berman could be very wrong. His points have been debated for years among those in the shale gas business. They are NOT revelations to anyone who is connected to shale gas and generally are not considered anything more than FUD. I've sat through many late night debates about all of these issues long before Berman ever voiced them.

The first thing Berman does wrong is typical of some engineers. He thinks "average wells" exist. CHK, DVN, and XTO all own very different acreage in the play, have different completion practices and histories, and even have different cost structures. Berman is averaging in the early wells that failed, the vertical wells with the horizontals, the wells in all types of geologic areas, and for every size and skill set of operator. Not even conventional plays will hold up to this type of "average well" analysis. Its a classic over-simplified engineering approach that can kill any new play. Core areas have very different production than the play overall. Berman ignores this.

"The gas companies are assuming a hyperbolic decline curve based on a very limited data set from a few wells, while Dr. Berman found, after studying far more wells.." This is nonsense. These operators have access to FAR MORE DATA than Berman can ever hope to see. Berman is restricted to the data in the public domain, which is reported to the Texas Railroad Commission according to their reporting requirements (which actually cause biases in the data). He can't possibly have BETTER data. That said, I agree that hyperbolic decline curves do overestimate EURs but the same is true for conventional reserves. Hyperbolic curves tend to reflect best case.

Berman's whole approach is flawed because he builds the worst results of the earliest learning curve (which in the Barnett was THE EARLY learning curve) in with later results. By combining these he is assuming that no one improves with experience, and that no operator is better than average.

Profitability is certainly a concern with lower gas prices. That is also true of the conventional Gulf of Mexico (especially deepwater) and all LNG. At some point no natural gas production makes money (yet supply may continue). Reductions in cost of drilling alone can dramatically change the economic potential of a well. At least one study by Drilling Info, Inc. found "there is a 80 to 100x differential in play reserves between static D,C& S costs and $7/mcfg...and $2.50/mcfg." Wellhead cost is not a valid way to address full cycle economics.

"Shale gas companies are funding drilling with debt and asset sales" is probably the one statement Berman makes that I am seriously concerned about. Some companies are clearly doing this, and others are benefiting from the "hype" surrounding their early success in these plays. Then again, isn't that the way the business works for anyone other than the Seven Sisters? It could easily be argued that those who are funding themselves this way are the best businesses, since in the long run they hope to leverage their way into larger and larger market share. That may have been the most effective way to deal with the downturn in 2008. In a rising commodity price market, they will reap the benefits. In a falling market, they seem to have buffered themselves. I think Berman's concern about this may have some validity, but is far too simplistic- again. I have a hard time believing that every operator drilling gas shale wells is doing it at a loss.

Take Berman with a grain of salt. His bias seems to be against all unconventional oil and gas, which I tend to believe is due to resistance to the geologic and engineering paradigm shift that has made gas shale possible. Likewise, he makes more money being controversial than being mundane.

Shale Gas: Promises, Promises, Promises

Yes, you can use the natural gas supplied to your home as auto fuel. You will be legally exempt from paying fuel taxes that are added to the cost of gasoline since natural gas is exempt. That savings alone is significant. You can buy a compressor unit that will allow you to fuel your car at home. As with most alternatives, it is barely economic for most people, but there is a savings in fuel cost (mostly due to taxes), improvements in engine wear (my opinion), improvements in carbon output, and you may be allowed to use the carpool lanes in some places, saving more fuel.


On Oct 27 01:09 PM cusip8 wrote:

> I have a question about nat. gas. I have very little knowledge about
> its components, but most homes on the west coast have a nat. gas
> pipe line service into their home. Would it be possible to have a
> pump at your house and you could fill you car at home with nat. gas,
> or is the gas that is pumped into your house not compatible as auto
> fuel? Wouldn

Natural Gas from Shale: Emerging Plays

I think your article sums up the potential fairly well. I see shale gas as a game changer that changes several things. It has already had an effect on world gas prices for NGL, because the US import market is failing to materialize. Europe and Japan are indirectly reaping the benefits of US shale gas in the form of lower prices for imports. At some point many shale gas plays will become NGL sources, and I think this is already being planned in the Canadian plays. Shale gas is likely to change markets for gas on most continents, and has potential to create industrialism in currently underdeveloped countries that have limited know resources at present. Because natural gas requires pipeline infrastructure, many companies are currently pipeline prospecting, to find gas in places where it can be marketed easily. That's one reason I don't think the Alaska gas pipeline is going to get built anytime soon.

There are risks, and many companies in the gas shale market are probably doomed to failure in the present market. That does not mean there will not be winners, but not everyone in the game will win. Drilling costs and initial investments in gas shale plays can be huge. Compared to conventional drilling where a well might drain a square mile of land (~260 hectares), many gas shale wells only drain 80 acres (~32 hectares). If short-term gas prices are high enough they can recover drilling costs in a year or two, but the capital to drill enough wells to ramp up production is significantly higher than the cost of a big-hit conventional gas well. Anachronistic leasing practices and bad regulatory policies abound in the gas shale plays that create another problem. Issues with public policy (NIMBYism), reliable sources of water for fracturing, and possible regulatory restrictions coming from the anti-carbon movement are other issues.

By the way, the Middle East is not without its own potential shale gas and the Saudis are already at work.

Overall, I totally agree that gas shale is already a game-changer, but its going to be a wild ride, and without major changes in consumption (demand) patterns natural gas is doomed to be highly cyclical as gas shale players react and over-react to market prices and other forces that keep them drilling even when the economics of individual wells don't make sense. There will be losers, and a few big winners from an investors standpoint.